eBay to Acquire Braintree

E-commerce service provider, eBay Inc. (EBAY), has agreed to acquire the mobile payment processor company – Braintree – for $800 million in cash. The transaction is expected to be completed before the end of the year, subject to the usual regulatory approvals.

Chicago-based Braintree was founded in 2007 by Bryan Johnson. It is a payment processing company which enables businesses to set up online payments through merchant accounts, mobile apps, credit card storage and payment gateways. Additionally, it offers a mobile app – Venmo – which lets consumers make payments via smartphones and tablets.

Braintree’s payment platform is used by many online and mobile startups, including Uber, Airbnb, Rovio, TaskRabbit, LivingSocial and OpenTable. The company charges a fee of 2.9% and an additional processing fee of 30 cents per transaction. For 2013, Braintree expects to process about $12 billion in payments, out of which $4 billion will be in mobile payments.

Management stated that Braintree will continue to operate as a separate service within PayPal. One of eBay’s fastest-growing businesses, PayPal, accounts for almost half of the company's annual revenues. The division will be led by Braintree CEO, Bill Ready, who will report directly to PayPal President, David Marcus. Management expects the acquisition to lower the company’s 2013 pro forma earnings by 1 cent without affecting its revenues.

This acquisition makes perfect sense as it will eliminate eBay’s major competitor in the mobile space, further adding PayPal's mobile payments capabilities through Braintree’s Venmo mobile app. It will likely put PayPal in a better position against rival mobile payment systems such as Google Inc’s (GOOG) digital wallet, Intuit Inc's (INTU) GoPayment and Starbucks-backed Square Inc. and others.

Today, the biggest growth driver in the industry is the adoption of smartphones, tablets and other mobile Internet devices. Consumers, today, prefer the convenience of ordering and paying online over the hassles of shopping at brick-and-mortar stores.

In order to benefit from this change, PayPal is taking all the necessary measures for continued growth in the mobile payment business. It is pushing beyond its online payments service and expanding its offline, mobile and online offerings to stores, restaurants and other businesses.

PayPal has introduced new solutions and acquired companies including Zong (a Chinese mobile carrier billing payment company acquired in 2011) to enhance the mobile shopping experience for its customers. In 2013, the company expects to generate $20 billion of mobile commerce and payments volume.

The Braintree acquisition is yet another move by PayPal to improve its mobile payment service. In March, the company acquired a mobile app development company – Duff Research – to help support PayPal’s dominant position in mobile payment systems. Very recently, eBay unveiled a hands-free payment system – Beacon – enabling consumers to make retail in-store payments without using their phone.

Though eBay’s payment business shows great promise, competition may be expected to pick up as banks and other companies announce their own payment systems and Google’s digital wallet gathers steam.

Currently, eBay’s shares carry a Zacks Rank #3 (Hold). Another stock that is performing well and is worth considering is Geeknet, Inc. (GKNT), carrying a Zacks Rank #1 (Strong Buy).